One of the biggest stresses in buying a home in Los Angeles is qualifying for a loan. It doesn’t take much for someone’s credit to be less than perfect. Even with imperfect credit, buyers are able to secure mortgages and get the funding they need to close escrow. Are you buying a home in [market city]? What should your credit score be? Here are some answers.
Federal Housing Administration Loan
The FHA loan is one of the more credit lenient loans available. FHA partner lenders are given the green light to approve loans with credit scores as low as FICO 500. Even with approval though, these loans require more down payment than a loan with a borrower of credit scores of 580 or higher. Ten percent down payment is required below 580 but only 3.5 percent down payment is required with FICO 580 or higher.
Veterans Affairs and US Department of Agriculture
These are two other federally insured loans, protecting lenders against borrower default. Neither of these has a minimum credit score set by the VA or USDA respectively. While that seems like it would be more lenient, these are often loans with zero down payment programs. As such, lenders have the discretion to set minimum limits, usually in the 620 range unless a borrower is offering a down payment and has more than adequate means to pay.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are known as conforming loans, meaning they must conform to standards allowing them to be sold on the secondary market and to investors. These loans often require FICO 620 or higher. There are conforming loan programs that do offer down payment requirements as little as 3 percent; for those with great credit, this is a great option to get into a home with less cash on hand.
More Than FICO
Lenders look at more than just the FICO score, though this is a major consideration. Lenders want to know why the FICO is imperfect. If you have had a foreclosure or bankruptcy, you may need to season them. Seasoning is the time between the foreclosure or bankruptcy discharge date and the loan origination. It can be as long as three years with a foreclosure and two for a bankruptcy.
Lenders also consider if the credit is improving. Have the issues that led to bad credit been addressed and it is just a matter of time before scores improve. This is why you should do everything to clean up credit before applying for a mortgage including paying off credit cards, dealing with late or delinquent payments and disputing errors.
The other major component is the debt-to-income (DTI) ratio. This is the total amount of monthly debt payments you make compared to monthly income. While the DTI may change from loan program to loan program, a good rule of thumb is not to have more than 31 percent of your monthly income before the mortgage payment going toward debt payments. This puts you at risk of not being able to meet monthly obligations if something goes wrong.
Consult a Lender
Talk to a lender if you are concerned about your ability to obtain a loan to buy a home in Los Angeles. There may be a few things you can do to clean up your credit and put yourself in a better position to get approved. They may also help you understand how co-signers and co-borrowers can make you a stronger borrower. Finding one, whether a family member or close friend, can make the difference between approval and denial.
Don’t start shopping for a home until you have these items taken care of. Nothing is more frustrating than finding the perfect home for you only to get the news that you can’t afford it. Pre-qualification is a general overview of your financial situation and not a strong look at credit. Pre-approval means a lender reviewed everything and is confident you meet the loan guidelines for approval.